Posted by Scott Ronalds

For a while, my partner Tom Bradley has been talking about how Canadian investors are less diversified than they should be (Feeling Comfortable? Maybe it's Time to Shake Up Your Portfolio). At times, it's like listening to a Jim Rome rant. But he's got a good point.

The Canadian stock market has been among the world's best performing markets over the last several years. This we all know. Yet, how many of us have done anything about it? - i.e., adjusted our portfolios to reflect our growing exposure to Canadian equities. If you emerged from the bear market earlier in the decade with 40% of your portfolio in Canadian equities, where do you stand now? 50%? 60%? 70%?

The outstanding returns that we have enjoyed in recent years have made it easy to become content with a heavy overweight exposure to Canada. Yet, this is not good investing. When the party ends and global equity markets start to outperform Canada once again (many overseas markets in fact surpassed the TSX in 2006), those with the Maple Leaf plastered all over their portfolio could be in for an unwanted hangover.

Recent fund sales indicate, however, that Canadian investors are getting the picture. While experts have been telling us for awhile to go global, we're finally starting to rack up the air miles. Let's take a look back at last year's fund flows (data provided by the Investment Funds Institute of Canada):

• Net sales of mutual funds in Canada in 2006 totaled roughly $20.8 billion (a decline of 8% from the previous year's sales, but a healthy number nonetheless).
• Of this amount, $6.7 billion flowed into foreign equity funds - quite the contrast from the $5.5 billion outflow that this category suffered in 2005, and the first year of positive net sales for these funds since 2002.
• Over $7 billion flowed out of Canadian equity funds. This was countered somewhat by $5.7 billion in net purchases into funds in the Canadian Dividend & Income category (which is primarily composed of dividend funds), yet even net sales in this popular group declined dramatically from the previous year.

Snapshot: Sales of Foreign and Canadian Equity Funds

The numbers suggest that we're trimming exposure to a domestic asset class that has had a superb run and buying into one that we've neglected. Now that's good investing.